Tortoise MLP Fund, Inc.

Transcription

1 SM Yield Growth Quality 2010 Annual Report November 30, 2010 Steady Wins

2 C o m p a n y a t a G l a n c e (NYSE: NTG) offers a closed-end fund strategy of investing in energy infrastructure MLPs and their affiliates, with an emphasis on natural gas infrastructure MLPs. Investment Focus NTG seeks to provide stockholders with a high level of total return with an emphasis on current distributions. The fund focuses primarily on midstream energy infrastructure MLPs that engage in the business of transporting, gathering and processing and storing natural gas and natural gas liquids (NGLs). Under normal circumstances, we invest at least 80 percent of NTG s total assets in MLP equity securities with at least 70 percent of total assets in natural gas infrastructure MLP equity securities. Of the total assets in the fund, we may invest as much as 50 percent in restricted securities, primarily through direct investments in securities of listed companies. We do not invest in privately held companies and limit our investment in any one security to 10 percent. About Energy Infrastructure Master Limited Partnerships MLPs are limited partnerships whose units trade on public exchanges such as the New York Stock Exchange (NYSE), the NYSE Alternext US and NASDAQ. Buying MLP units makes an investor a limited partner in the MLP. There are currently approximately 70 MLPs in the market, mostly in industries related to energy and natural resources. We primarily invest in MLPs and their affiliates in the energy infrastructure sector, with an emphasis on natural gas infrastructure MLPs. Energy infrastructure MLPs are engaged in the transportation, storage and processing of crude oil, natural gas and refined products from production points to the end users. Natural gas infrastructure MLPs are companies in which over 50 percent of their revenue, cash flow or assets are related to the operation of natural gas or NGL infrastructure assets. Our investments are primarily in midstream (mostly pipeline) operations, which typically produce steady cash flows with less exposure to commodity prices than many alternative investments in the broader energy industry. With the growth potential of this sector along with our disciplined investment approach, we endeavor to generate a predictable and increasing distribution stream for our investors. An NTG Investment Versus a Direct Investment in MLPs We provide our stockholders an alternative to investing directly in MLPs and their affiliates. A direct MLP investment potentially offers an attractive distribution with a significant portion treated as return of capital, and a historically low correlation to returns on stocks and bonds. However, the tax characteristics of a direct MLP investment are generally undesirable for tax-exempt investors such as retirement plans. We are structured as a C Corporation accruing federal and state income taxes based on taxable earnings and profits. Because of this innovative structure, pioneered by Tortoise Capital Advisors, institutions and retirement accounts are able to join individual stockholders as investors in MLPs. Additional features include: n The opportunity for tax deferred distributions and distribution growth; n Simplified tax reporting (investors receive a single 1099) compared to directly owning MLP units; n Appropriate for retirement and other tax exempt accounts; n Potential diversification of overall investment portfolio; and n Professional securities selection and active management by an experienced adviser. Allocation of Portfolio Assets November 30, 2010 (Unaudited) (Percentages based on total investment portfolio) Natural Gas/Natural Gas Liquids Pipelines 48.3 Natural Gas Gathering/Processing 26.0 Crude/Refined Products Pipelines 19.7 Propane Distribution b A portfolio with an emphasis on natural gas infrastructure MLPs offers favorable fundamentals Domestic n ~90% of natural gas consumed domestically comes from the U.S. (1) n Natural gas provides a means for greater energy independence Abundant n The U.S. has enough natural gas to last for 100 years (2) n Improved technology is enabling natural gas production from new regions around the U.S., such as 20 key shale plays Clean & Reliable n Produces less carbon and sulfur dioxide than coal (3) n Reliable source versus wind and solar, which rely on the weather (4) n Desirable fuel for environmentally-friendly power generation (1) Energy Information Administration (2009) (2) NaturalGas.org (2010) (3) Environmental Protection Agency (4) IFC International (2009)

3 January 13, 2011 D e a r F e l l o w S t o c k h o l d e r s, In July 2010, we launched Tortoise MLP Fund (NYSE: NTG) and raised $1.1 billion in equity capital, which demonstrated the impressive strength of the capital markets and the attractiveness of MLPs. NTG provides a unique focus on the favorable business fundamentals of natural gas infrastructure MLPs. We believe natural gas will play a crucial role in meeting the need for clean, reliable energy and the growth potential stemming from the infrastructure needed to support the abundant supply in natural gas shale basins is quite compelling. We fully invested the proceeds from our initial public offering in under four months, well ahead of our targeted investment period, and also completed the placement of long-term leverage. Natural gas infrastructure MLPs comprise more than 80 percent of our portfolio and dominate our top 10 holdings. Our portfolio also reflects our emphasis on midstream MLPs with fee-based, recurring revenue streams. In fiscal 2010, these portfolio companies maintained and grew their distributions, improved cash distribution coverage and strengthened their balance sheets. Master Limited Partnership Sector Review and Outlook From our inception at July 27, 2010 to our fiscal year ended Nov. 30, 2010, the Tortoise MLP Total Return Index (TMLPT) had a total return of approximately 13.1 percent as compared to 6.8 percent for the S&P 500. These returns were driven by continued sector growth and the resulting increase in MLP distributions. We were actively engaged in investing our initial capital during this period. Midstream MLPs benefited from the underlying strength in their business fundamentals. For natural gas transporters, the reservation charge structure inherent in their business provided for stable cash flow streams. Gathering and processing companies advanced due to higher production of NGLs (natural gas liquids) and robust prices relative to natural gas. Demand for services to gather, process, transport and store crude oil, natural gas and natural gas liquids rose as the economy began to improve. Additionally, integrated and other energy companies sold approximately $40 billion of assets to MLPs (including dropdowns and general partner transactions) and nearly $10 billion was invested in new internal growth projects in fiscal Capital markets were supportive of sector growth, with more than $20 billion of debt and over $14 billion of equity issued to support this activity. For the first time since the spring of 2008, an MLP IPO was completed, with a total of five MLP IPOs in fiscal We think this alone speaks to the general health of the sector. Our outlook remains positive for midstream MLPs. We expect the need for growth capital in 2011 to be consistent with recent levels as companies focus on the development of the EagleFord shale in South Texas, the Bakken shale around North Dakota, the Marcellus shale located in the Appalachia region, and the Haynesville shale in east Texas and northern Louisiana. Significant infrastructure build-out is needed to connect end-users with these prolific new sources of natural gas supply, with investor willingness to fund this growth remaining strong. Additionally, we believe demand for both natural gas and refined products will improve as the economy expands and the population grows. We expect accompanying MLP distribution growth in the mid-single digits in fiscal Fund Performance Review and Outlook We ended fiscal year 2010 with total assets of $1.5 billion. Our total return based on market value, including the reinvestment of distributions, was -2.0 percent for the fourth fiscal quarter, and also from our inception through our fiscal year end. On a net asset value (NAV) basis, our total return was 7.9 percent for the fourth fiscal quarter and 5.8 percent from our inception through the end of our fiscal year, after factoring in the underwriter discount and other offering costs. Our NAV grew as a result of our accelerated investment strategy, strong underlying asset performance and the execution of our direct investment strategy. We invested over 50 percent of our initial capital directly, which accounted for $0.28 per share in NAV enhancement during that period. We continue to expect NAV growth, as the underlying companies in our portfolio grow their distributions. We paid a partial distribution of $0.36 per common share to our stockholders on Nov. 30, 2010, based on partial investment of our initial proceeds. This represented an annualized yield of 6.0 percent based on (Unaudited) 2010 Annual Report 1

4 our fiscal year closing price of $ We continue to expect to pay a first quarter 2011 distribution of not less than $ per share, and achieve a 6.5 percent yield on our $25 per share IPO price. We intend to grow our distribution as we determine such increases are sustainable and adequately covered by earned distributable cash flow (DCF). Our payout ratio of distributions to DCF for the fiscal year was 95.6 percent, which is in line with our expectations to pay out at least 95 percent of DCF to stockholders annually. For tax purposes, distributions to stockholders for 2010 were 100 percent return of capital. We ended our fiscal year with leverage (including bank debt, senior notes and preferred stock) at 23 percent of total assets, below our long-term target of 25 percent. We are pleased with our leverage profile and were able to utilize a greater degree of fixed-rate leverage with a longer average maturity than we had originally anticipated. As of Nov. 30, 2010, 84.1 percent of our leverage had fixed interest or distribution rates, a weighted average maturity of 6.9 years, and a weighted average cost of 3.88 percent. While our cost of leverage is higher than current short-term rates, we believe a primarily fixed-rate strategy with laddered maturities enhances the predictability and sustainability of our distributable cash flow, across interest rate environments. Additional information about our financial performance is available in the Key Financial Data and Management s Discussion of this report. Conclusion We intend to anchor our investment strategy in Tortoise s trade-mark philosophy of yield, growth and quality. We believe we are well-positioned to execute this strategy by focusing on high quality natural gas energy infrastructure MLPs with distribution growth potential driven by the build-out of critical infrastructure. Thank you for your recent investment in NTG. We look forward to a promising Sincerely, The Managing Directors Tortoise Capital Advisors, L.L.C. The adviser to H. Kevin Birzer Zachary A. Hamel Kenneth P. Malvey Terry Matlack David J. Schulte 2

5 K e y F i n a n c i a l D a t a (Supplemental Unaudited Information) (dollar amounts in thousands unless otherwise indicated) The information presented below regarding Distributable Cash Flow and Selected Operating Ratios is supplemental non-gaap financial information, which we believe is meaningful to understanding our operating performance. The Selected Operating Ratios are the functional equivalent of EBITDA for non-investment companies, and we believe they are an important supplemental measure of performance and promote comparisons from periodto-period. Supplemental non-gaap measures should be read in conjunction with our full financial statements. Period from July 30, 2010 (1) through November 30, 2010 Total Income from Investments Distributions received from master limited partnerships $ 20,896 Dividends paid in stock 1,075 Interest and dividend income 182 Total from investments 22,153 Operating Expenses Before Leverage Costs and Current Taxes Advisory fees, net of expense reimbursement 2,910 Other operating expenses 441 3,351 Distributable cash flow before leverage costs 18,802 Leverage costs (2) 1,708 Distributable Cash Flow (3) $ 17,094 Distributions paid on common stock $ 16,346 Distributions paid on common stock per share 0.36 Payout percentage for period (4) 95.6 % Net realized gain, net of income taxes, for the period 208 Total assets, end of period 1,524,903 Average total assets during period (5) 1,238,974 Leverage (long-term debt obligations and short-term borrowings) (6) 350,700 Leverage as a percent of total assets 23.0 % Net unrealized appreciation, end of period 67,396 Net assets, end of period 1,131,120 Average net assets during period (7) 1,087,459 Net asset value per common share Market value per common share Shares outstanding 45,404,188 Selected Operating Ratios (8) As a Percent of Average Total Assets Total distributions received from investments N/M Operating expenses before leverage costs 0.80 % Distributable cash flow before leverage costs N/M As a Percent of Average Net Assets Distributable cash flow (3) N/M (1) Commencement of operations (2) Leverage costs include interest expense, distributions to preferred stockholders and other recurring leverage expenses. (3) Net investment loss, before income taxes on the Statement of Operations is adjusted as follows to reconcile to Distributable Cash Flow (DCF): increased by the return of capital on MLP distributions and the value of paid-in-kind distributions and amortization of debt issuance costs. (4) Distributions paid as a percentage of Distributable Cash Flow. (5) Computed by averaging month-end values within each period. (6) The balance on the short-term credit facility was $30,700,000 as of November 30, (7) Computed by averaging daily values for the period. (8) Annualized for periods less than one full year. Certain of the ratios for the reporting period are not meaningful due to partial investment of initial offering and leverage proceeds Annual Report 3

6 M a n a g e m e n t s D i s c u s s i o n (Unaudited) Management s Discussion The information contained in this section should be read in conjunction with our Financial Statements and the Notes thereto. In addition, this report contains certain forward-looking statements. These statements include the plans and objectives of management for future operations and financial objectives and can be identified by the use of forward-looking terminology such as may, will, expect, intend, anticipate, estimate, or continue or the negative thereof or other variations thereon or comparable terminology. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-looking statements are set forth in the Risk Factors section of our public filings with the SEC. Introduction We include the Management s Discussion section in each quarterly report to provide you transparency and insight into the results of operations, including comparative information to prior periods and trends. In addition, we include a Key Financial Data page which provides quarterly and annual detail of our distributable cash flow ( DCF ) and other important metrics, including leverage and selected operating ratios. We hope that you find this discussion and financial data a useful supplement to the GAAP financial information included in this report. The Key Financial Data page in this quarter s report reflects information from July 30, 2010 (commencement of operations) through fiscal year end November 30, Overview s ( NTG ) primary investment objective is to provide a high level of total return with an emphasis on current distributions paid to stockholders. We seek to provide our stockholders with an efficient vehicle to invest in a portfolio consisting primarily of energy infrastructure master limited partnerships ( MLPs ) and their affiliates, with an emphasis on natural gas infrastructure. Energy infrastructure MLPs own and operate a network of pipeline and energy-related logistical assets that transport, store, gather and process natural gas, natural gas liquids ( NGLs ), crude oil, refined petroleum products, and other resources or distribute, market, explore, develop or produce such commodities. Natural gas infrastructure MLPs are defined as companies engaged in such activities with over 50 percent of their revenue, cash flow or assets related to natural gas or NGL infrastructure assets. NTG is a registered non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the 1940 Act ). Tortoise Capital Advisors, L.L.C. (the Adviser ) serves as investment adviser. Company Update NTG completed its initial public offering and commenced operations on July 30, We issued 42,400,000 shares at $25.00 per share for net proceeds after expenses of approximately $1.01 billion and issued an additional 3,000,000 shares during the overallotment period representing approximately $71 million in net proceeds. We completed investment of these proceeds in late September. We issued $320 million in senior notes and mandatorily redeemable preferred stock in October, investing these proceeds by mid-november. The portfolio holdings and weightings are consistent with our target portfolio of at least 70 percent of our assets invested in natural gas infrastructure MLPs, with a focus on the midstream sector. We paid a 4th quarter distribution of $0.36 per share on November 30, 2010, and expect to pay a 1st quarter 2011 distribution of not less than $ per share. Additional information on these events and results of our operations are discussed below. Critical Accounting Policies The financial statements are based on the selection and application of critical accounting policies, which require management to make significant estimates and assumptions. Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management s most difficult, complex, or subjective judgments. Our critical accounting policies are those applicable to the valuation of investments and certain revenue recognition matters as discussed in Note 2 in the Notes to Financial Statements. Determining Distributions to Stockholders Our portfolio generates cash flow from which we pay distributions to stockholders. We intend to pay out substantially all of our distributable cash flow ( DCF ) to holders of common stock through quarterly distributions. Our Board of Directors reviews the distribution rate quarterly, and may adjust the quarterly distributions throughout the year. Our goal is to declare what we believe to be sustainable increases in our regular quarterly distributions with increases safely covered by earned DCF. We have targeted to pay at least 95 percent of DCF on an annualized basis. Determining DCF DCF is simply income from investments less expenses. Income from investments includes the amount we receive as cash or paid-in-kind distributions from MLPs or affiliates of MLPs in which we invest and interest payments on short-term debt securities we own. The total expenses include current or anticipated operating expenses, leverage costs and current income taxes (excluding taxes generated from realized gains), if any. We expect to retain realized capital gains, if any, net of applicable taxes. Expected tax benefits are not included in our DCF. Each are summarized for you in the table on page 3 and are discussed in more detail below. The Key Financial Data table discloses the calculation of DCF and should be read in conjunction with this discussion. The difference between distributions received from investments in the DCF calculation and total investment income as reported in the Statement of Operations, is reconciled as follows: the Statement of Operations, in conformity with U.S. generally accepted accounting principles ( GAAP ), recognizes distribution income from MLPs and common stock on their ex-dates, whereas the DCF calculation reflects distribution income on their pay dates; GAAP recognizes that a significant portion of the cash distributions received from MLPs are characterized as a return of capital and therefore excluded from investment income, whereas the DCF calculation includes the return of capital; and distributions received from investments in the DCF calculation include the value of dividends paid-in-kind (additional stock or MLP units), whereas such amounts are not included as income for GAAP purposes. The treatment of expenses in the DCF calculation also differs from what is reported in the Statement of Operations. In addition to the total operating expenses, including expense reimbursement, as disclosed in the Statement of Operations, the DCF calculation reflects interest expense, distributions to preferred stockholders, other recurring leverage expenses, as well as current taxes paid. A reconciliation of Net Investment Loss, before Income Taxes to DCF is included below. Distributions Received from Investments Our ability to generate cash is dependent on the ability of our portfolio of investments to generate cash flow from their operations. In order to maintain and grow distributions to our stockholders, we evaluate each holding based upon its contribution to our investment income, our expectation for its growth rate, and its risk relative to other potential investments. We concentrate on MLPs we believe can expect an increasing demand for services from economic and population growth. We seek well-managed businesses with hard assets and stable recurring revenue streams. Our focus remains primarily on investing in fee-based service providers that operate long-haul, interstate pipelines. We further diversify among issuers, geographies and energy commodities to seek a distribution payment which approximates an investment directly in energy infrastructure MLPs. In addition, most energy infrastructure companies are regulated and utilize an inflation escalator index that factors in inflation as a cost pass-through. So, over the long-term, we believe MLPs distributions will outpace inflation and interest rate increases, and produce positive real returns. Total distributions received from our investments for the period from commencement of operations through November 30, 2010 was approximately $22.2 million. This does not reflect a full quarter s earnings on our total capital as we were investing proceeds throughout the quarter. Expenses We incur two types of expenses: (1) operating expenses, consisting primarily of the advisory fee; and (2) leverage costs. On a percentage basis, operating expenses before leverage costs were an annualized 0.80 percent of average total assets for the period from 4

7 M a n a g e m e n t s D i s c u s s i o n (Unaudited) (Continued) commencement of operations through November 30, While the contractual advisory fee is 0.95 percent of average monthly managed assets, the Adviser has agreed to waive an amount equal to 0.25 percent of average monthly managed assets for year 1 and 0.10 percent of average monthly managed assets for year 2 following the closing of the initial public offering. Leverage costs consist of two major components: (1) the direct interest expense on our senior notes and short-term credit facility; and (2) distributions to preferred stockholders. Other leverage expenses include rating agency fees and commitment fees. Total leverage costs of $1.7 million through November 30, 2010 do not reflect a full quarter of leverage expenses as we issued our leverage in October The weighted average annual rate of our leverage at November 30, 2010 was 3.63 percent including our bank credit facility. Our weighted average rate may vary in future periods as a result of changes in LIBOR and the utilization of our credit facility. Additional information on our leverage is included in the Liquidity and Capital Resources discussion below. Distributable Cash Flow As outlined above, DCF is simply income from investments less expenses. DCF for the period from July 30, 2010 through November 30, 2010 was $17.1 million and does not reflect a full quarter of earnings on our invested capital or leverage expenses. We declared and paid an initial distribution of $16.3 million or $0.36 per share during the quarter representing a dividend payout ratio as a percentage of DCF of 95.6 percent. In addition, we announced we expect to pay a first quarter 2011 distribution of not less than $ per share. Net investment loss before income taxes on the Statement of Operations is adjusted as follows to reconcile to DCF for the initial fiscal period ended November 30, 2010 (in thousands): 2010 Net Investment Loss, before Income Taxes $ (2,640) Adjustments to reconcile to DCF: Dividends paid in stock 1,075 Return of capital on distributions 18,602 Amortization of debt issuance costs 57 DCF $ 17,094 Liquidity and Capital Resources We had total assets of $1.5 billion at year-end. Our total assets reflect the value of our investments, which are itemized in the Schedule of Investments. It also reflects cash, interest and dividends receivable and any expenses that may have been prepaid. We ve entered into a $60 million, 364-day unsecured credit facility. The credit facility has a variable annual interest rate equal to the one-month LIBOR plus 1.25 percent and a non-usage fee equal to an annual rate of 0.20 percent of the difference between the total credit facility commitment and the average outstanding balance at the end of each day. The facility matures September 23, During the month of October, we completed private placements of $230 million of senior notes and $90 million of preferred stock. This longer-term leverage has a weighted average laddered maturity of 7.5 years. Details of our notes and preferred stock are outlined in the tables below. Senior Notes Series Amount Rate Due Date A $ 12,000, % December 15, 2013 B $ 24,000, % December 15, 2015 C $ 57,000, % December 15, 2017 D $ 112,000, % December 15, 2020 E $ 25,000,000 Floating Rate December 15, 2015 $ 230,000,000 Mandatorily Redeemable Preferred Stock Series Amount Rate Redemption Date A $ 25,000, % December 15, 2015 B $ 65,000, % December 15, 2017 $ 90,000,000 Total leverage represented 23.0 percent of total assets at November 30, We have a long-term leverage target of 25 percent of total assets at time of incurrence. Temporary increases of up to 30 percent of our total assets may be permitted, provided that such leverage is consistent with the limits set forth in the 1940 Act, and that such leverage is expected to be reduced over time in an orderly fashion to reach our long-term target. Our leverage ratio is impacted by increases or decreases in MLP values, issuance of equity and/or the sale of securities where proceeds are used to reduce leverage. We use leverage to acquire MLPs consistent with our investment philosophy. The terms of our leverage are governed by regulatory and contractual asset coverage requirements that arise from the use of leverage. Our coverage ratios are updated each week on our Web site at Taxation of our Distributions and Deferred Taxes We invest in partnerships which generally have larger distributions of cash than the accounting income which they generate. Accordingly, the distributions include a return of capital component for accounting and tax purposes. Distributions declared and paid by us in a year generally differ from taxable income for that year, as such distributions may include the distribution of current year taxable income or return of capital. The taxability of the distribution you receive depends on whether we have annual earnings and profits. If so, those earnings and profits are first allocated to the preferred shares and then to the common shares. In the event we have earnings and profits allocated to our common shares, all or a portion of our distribution will be taxable at the 15 percent Qualified Dividend Income ( QDI ) rate, assuming various holding requirements are met by the stockholder. The portion of our distribution that is taxable may vary for either of two reasons: first, the characterization of the distributions we receive from MLPs could change annually based upon the K-1 allocations and result in less return of capital and more in the form of income. Second, we could sell an MLP investment and realize a gain or loss at any time. It is for these reasons that we inform you of the tax treatment after the close of each year as the ultimate characterization of our distributions is undeterminable until the year is over. The portion of our distribution that is not income is treated as a return of capital. A holder of our common stock will reduce their cost basis for income tax purposes by the amount designated as return of capital. For tax purposes, the distribution to common stockholders for the fiscal year ended 2010 was 100 percent return of capital. A holder of our common stock would reduce their cost basis for income tax purposes by an amount equal to the total distributions they received in This information will be reported to stockholders on Form 1099-DIV and will be available on our Web site at For book purposes, the source of the distribution to common stockholders for the fiscal year ended 2010 was 100 percent return of capital. The unrealized gain or loss we have in the portfolio is reflected in the Statement of Assets and Liabilities. At November 30, 2010, our investments are valued at approximately $1.521 billion, with an adjusted cost of $1.414 billion. The $107 million difference reflects unrealized appreciation that would be realized for financial statement purposes if those investments were sold at those values. The Statement of Assets and Liabilities also reflects either a deferred tax liability or deferred tax asset depending upon unrealized gains (losses) on investments, realized gains (losses) on investments, capital loss carryforwards and net operating losses. At November 30, 2010, the balance sheet reflects a deferred tax liability of approximately $39 million or $0.85 per share. Accordingly, our net asset value per share represents the amount which would be available for distribution to stockholders after payment of taxes. Details of our deferred taxes are disclosed in Note 5 in our Notes to Financial Statements Annual Report 5

8 S c h e d u l e o f I n v e s t m e n t s November 30, 2010 Shares Fair Value Shares Fair Value Master Limited Partnerships and Related Companies 134.5% (1) Natural Gas/Natural Gas Liquids Pipelines 64.9% (1) United States 64.9% (1) Boardwalk Pipeline Partners, LP 3,022,000 $ 93,682,000 Duncan Energy Partners L.P. 196,100 6,151,657 El Paso Pipeline Partners, L.P. 3,087, ,248,064 Energy Transfer Partners, L.P. 2,735, ,607,785 Enterprise Products Partners L.P. 2,852, ,020,576 Niska Gas Storage Partners LLC 1,598,628 31,940,588 ONEOK Partners, L.P. 969,075 76,760,431 PAA Natural Gas Storage, L.P. 70,975 1,676,430 Spectra Energy Partners, LP 775,809 26,323,199 TC PipeLines, LP 493,300 22,933,517 Williams Partners L.P. 2,419, ,837, ,181,722 Natural Gas Gathering/Processing 35.0% (1) United States 35.0% (1) Chesapeake Midstream Partners, L.P. 568,854 16,212,339 Copano Energy, L.L.C. 2,071,000 61,985,030 DCP Midstream Partners, LP 1,775,187 61,954,026 MarkWest Energy Partners, L.P. 1,471,900 62,305,527 Regency Energy Partners LP 4,146, ,567,620 Targa Resources Partners LP 2,247,100 68,064,659 Western Gas Partners LP 616,500 18,359, ,448,571 Propane Distribution 8.1% (1) United States 8.1% (1) Inergy, L.P. 2,337,600 $ 91,213,152 Total Master Limited Partnerships and Related Companies (Cost $1,414,305,677) 1,520,910,945 Short-Term Investments 0.0% (1) United States Investment Companies 0.0% (1) Morgan Stanley Institutional Liquidity Fund, 0.19% (3) (Cost $101,141) 101, ,141 Total Investments 134.5% (1) (Cost $1,414,406,818) 1,521,012,086 Other Assets and Liabilities (6.2%) (1) (69,892,150) Long-Term Debt Obligations (20.3%) (1) (230,000,000) Mandatory Redeemable Preferred Stock at Liquidation Value (8.0%) (1) (90,000,000) Total Net Assets Applicable to Common Stockholders 100.0% (1) $1,131,119,936 (1) Calculated as a percentage of net assets applicable to common stockholders. (2) Security distributions are paid-in-kind. (3) Rate indicated is the current yield as of November 30, Crude/Refined Products Pipelines 26.5% (1) United States 26.5% (1) Buckeye Partners, L.P. 102,260 6,960,838 Enbridge Energy Management, L.L.C. (2) 73,000 4,447,162 Enbridge Energy Partners, L.P. 940,000 57,199,000 Holly Energy Partners, L.P. 735,300 37,610,595 Kinder Morgan Management, LLC (2) 976,273 62,471,708 Magellan Midstream Partners, L.P. 746,354 41,795,824 NuStar Energy L.P. 802,383 54,120,733 Plains All American Pipeline, L.P. 400,100 24,606,150 Sunoco Logistics Partners L.P. 134,600 10,855, ,067,500 See accompanying Notes to Financial Statements. 6

9 S t a t e m e n t o f A s s e t s & L i a b i l i t i e s November 30, 2010 S t a t e m e n t o f O p e r a t i o n s Period From July 30, 2010 (1) through November 30, 2010 Assets Investments at fair value (cost $1,414,406,818) $ 1,521,012,086 Receivable for Adviser expense reimbursement 590,722 Receivable for investments sold 532,334 Dividend receivable 3,585 Prepaid expenses and other assets 2,764,022 Total assets 1,524,902,749 Liabilities Payable to Adviser 2,244,745 Payable for investments purchased 325,347 Accrued expenses and other liabilities 1,928,728 Current tax liability 50,000 Deferred tax liability 38,533,993 Short-term borrowings 30,700,000 Long-term debt obligations 230,000,000 Mandatory redeemable preferred stock ($25.00 liquidation value per share; 3,600,000 shares outstanding) 90,000,000 Total liabilities 393,782,813 Net assets applicable to common stockholders $ 1,131,119,936 Net Assets Applicable to Common Stockholders Consist of: Capital stock, $0.001 par value; 45,404,188 shares issued and outstanding (100,000,000 shares authorized) $ 45,404 Additional paid-in capital 1,065,364,088 Accumulated net investment loss, net of income taxes (1,893,809) Undistributed realized gain, net of income taxes 208,403 Net unrealized appreciation of investments, net of income taxes 67,395,850 Net assets applicable to common stockholders $ 1,131,119,936 Net Asset Value per common share outstanding (net assets applicable to common stock, divided by common shares outstanding) $ Investment Income Distributions from master limited partnerships $ 20,895,513 Less return of capital on distributions (18,602,251) Net distributions from master limited partnerships 2,293,262 Dividends from money market mutual funds 181,850 Total Investment Income 2,475,112 Operating Expenses Advisory fees 3,948,784 Administrator fees 143,253 Professional fees 89,258 Stockholder communication expenses 63,991 Directors fees 50,015 Fund accounting fees 28,006 Custodian fees and expenses 20,909 Franchise fees 20,000 Registration fees 13,895 Stock transfer agent fees 3,593 Other operating expenses 8,182 Total Operating Expenses 4,389,886 Interest expense 1,163,147 Distributions to mandatory redeemable preferred stockholders 498,269 Amortization of debt issuance costs 57,178 Other leverage expenses 46,264 Total Leverage Expenses 1,764,858 Total Expenses 6,154,744 Less expense reimbursement by Adviser (1,039,154) Net Expenses 5,115,590 Net Investment Loss, before Income Taxes (2,640,478 ) Current tax expense (50,000) Deferred tax benefit 796,669 Income tax benefit, net 746,669 Net Investment Loss (1,893,809 ) Realized and Unrealized Gain on Investments Net realized gain on investments, before income taxes 329,648 Deferred tax expense (121,245) Net realized gain on investments 208,403 Net unrealized appreciation of investments, before income taxes 106,605,267 Deferred tax expense (39,209,417) Net unrealized appreciation of investments 67,395,850 Net Realized and Unrealized Gain on Investments 67,604,253 Net Increase in Net Assets Applicable to Common Stockholders Resulting from Operations $ 65,710,444 (1) Commencement of Operations. See accompanying Notes to Financial Statements Annual Report 7

10 S t a t e m e n t o f C h a n g e s i n N e t A s s e t s Period from July 30, 2010 (1) through November 30, 2010 S t a t e m e n t o f C a s h F l o w s Period from July 30, 2010 (1) through November 30, 2010 Operations Net investment loss $ (1,893,809) Net realized gain on investments 208,403 Net unrealized appreciation of investments 67,395,850 Net increase in net assets applicable to common stockholders resulting from operations 65,710,444 Distributions to Common Stockholders Net investment income Return of capital (16,345,508) Total distributions to common stockholders (16,345,508) Capital Stock Transactions Proceeds from initial public offering of 45,400,000 common shares 1,135,000,000 Underwriting discounts and offering expenses associated with the issuance of common stock (53,345,000) Net increase in net assets applicable to common stockholders from capital stock transactions 1,081,655,000 Total increase in net assets applicable to common stockholders 1,131,019,936 Net Assets Beginning of period 100,000 End of period $ 1,131,119,936 Accumulated net investment loss, net of income taxes, end of period $ (1,893,809) (1) Commencement of Operations. Cash Flows From Operating Activities Distributions received from master limited partnerships $ 20,895,513 Dividend income received 178,265 Purchases of long-term investments (1,444,023,894) Proceeds from sales of long-term investments 11,238,626 Purchases of short-term investments, net (101,141) Other leverage expenses paid (229,666) Operating expenses paid (1,458,142) Net cash used in operating activities (1,413,500,439 ) Cash Flows From Financing Activities Advances from revolving line of credit 58,650,000 Repayments on revolving line of credit (27,950,000) Issuance of common stock 1,135,000,000 Issuance of mandatory redeemable preferred stock 90,000,000 Issuance of long-term debt obligations 230,000,000 Common stock issuance costs (53,345,000) Debt issuance costs (2,609,053) Distributions paid to common stockholders (16,345,508) Net cash provided by financing activities 1,413,400,439 Net change in cash (100,000) Cash beginning of period 100,000 Cash end of period $ Reconciliation of net increase in net assets applicable to common stockholders resulting from operations to net cash used in operating activities Net increase in net assets applicable to common stockholders resulting from operations $ 65,710,444 Adjustments to reconcile net increase in net assets applicable to common stockholders resulting from operations to net cash used in operating activities: Purchases of long-term investments (1,444,349,241) Return of capital on distributions received 18,602,251 Proceeds from sales of long-term investments 11,770,960 Purchases of short-term investments, net (101,141) Deferred tax expense 38,533,993 Net unrealized appreciation of investments (106,605,267) Net realized gain on investments (329,648) Amortization of debt issuance costs 57,178 Changes in operating assets and liabilities: Increase in dividend receivable (3,585) Increase in receivable for investments sold (532,334) Increase in prepaid expenses and other assets (202,640) Increase in payable for investments purchased 325,347 Increase in payable to Adviser, net of expense reimbursement 1,654,023 Increase in current tax liability 50,000 Increase in accrued expenses and other liabilities 1,919,221 Total adjustments (1,479,210,883) Net cash used in operating activities $ (1,413,500,439) (1) Commencement of Operations. See accompanying Notes to Financial Statements. 8

11 F i n a n c i a l H i g h l i g h t s Period from July 30, 2010 (1) through November 30, 2010 Per Common Share Data (2) Public offering price $ Income (Loss) from Investment Operations Net investment loss (0.04) Net realized and unrealized gain on investments 1.49 Total income from investment operations 1.45 Less Distributions to Common Stockholders: Net investment income Return of capital (0.36) Total distributions to common stockholders (0.36 ) Underwriting discounts and offering costs on issuance of common stock (3) (1.18 ) Net Asset Value, end of period $ Per common share market value, end of period $ Total Investment Return Based on Market Value (4) (2.02)% Supplemental Data and Ratios Net assets applicable to common stockholders, end of period (000 s) $ 1,131,120 Average net assets (000 s) $ 1,087,459 Ratio of Expenses to Average Net Assets (5) Advisory fees 1.07 % Other operating expenses 0.12 Expense reimbursement (0.28) Subtotal 0.91 Leverage expenses 0.48 Income tax expense (6) Total expenses % Ratio of net investment loss to average net assets before expense reimbursement (5) (0.79)% Ratio of net investment loss to average net assets after expense reimbursement (5) (0.51)% Portfolio turnover rate (5) 3.65 % Short-term borrowings, end of period (000 s) $ 30,700 Long-term debt obligations, end of period (000 s) $ 230,000 Preferred stock, end of period (000 s) $ 90,000 Per common share amount of long-term debt obligations outstanding, end of period $ 5.07 Per common share amount of net assets, excluding long-term debt obligations, end of period $ Asset coverage, per $1,000 of principal amount of long-term debt obligations and short-term borrowings (7) $ 5,684 Asset coverage ratio of long-term debt obligations and short-term borrowings (7) 568 % Asset coverage, per $25 liquidation value per share of mandatory redeemable preferred stock (8) $ 106 Asset coverage ratio of preferred stock (8) 423 % (1) Commencement of Operations. (2) Information presented relates to a share of common stock outstanding for the entire period. (3) Represents the dilution per common share from underwriting and other offering costs for the period from July 30, 2010 through November 30, (4) Not annualized. Total investment return is calculated assuming a purchase of common stock at the initial public offering price and a sale at the closing price on the last day of the period reported (excluding brokerage commissions). (5) Annualized for periods less than one full year. (6) For the period from July 30, 2010 to November 30, 2010, the Company accrued $50,000 for current income tax expense and $38,533,993 for net deferred income tax expense. (7) Represents value of total assets less all liabilities and indebtedness not represented by long-term debt obligations, short-term borrowings and preferred stock at the end of the period divided by long-term debt obligations and short-term borrowings outstanding at the end of the period. (8) Represents value of total assets less all liabilities and indebtedness not represented by long-term debt obligations, short-term borrowings and preferred stock at the end of the period divided by the sum of long-term debt obligations, short-term borrowings and preferred stock outstanding at the end of the period. See accompanying Notes to Financial Statements Annual Report 9

12 N o t e s t o F i n a n c i a l S t a t e m e n t s November 30, Organization (the Company ) was organized as a Maryland corporation on April 23, 2010, and is a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the 1940 Act ). The Company s investment objective is to seek a high level of total return with an emphasis on current distributions paid to stockholders. The Company seeks to provide its stockholders with an efficient vehicle to invest in the energy infrastructure sector, with an emphasis on natural gas infrastructure. The Company commenced operations on July 30, The Company s stock is listed on the New York Stock Exchange under the symbol NTG. 2. Significant Accounting Policies A. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, recognition of distribution income and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. B. Investment Valuation The Company primarily owns securities that are listed on a securities exchange or over-the-counter market. The Company values those securities at their last sale price on that exchange or over-the-counter market on the valuation date. If the security is listed on more than one exchange, the Company uses the price from the exchange that it considers to be the principal exchange on which the security is traded. Securities listed on the NASDAQ will be valued at the NASDAQ Official Closing Price, which may not necessarily represent the last sale price. If there has been no sale on such exchange or over-the-counter market on such day, the security will be valued at the mean between the last bid price and last ask price on such day. The Company may invest up to 50 percent of its total assets in restricted securities. Restricted securities are subject to statutory or contractual restrictions on their public resale, which may make it more difficult to obtain a valuation and may limit the Company s ability to dispose of them. Investments in restricted securities and other securities for which market quotations are not readily available will be valued in good faith by using fair value procedures approved by the Board of Directors. Such fair value procedures consider factors such as discounts to publicly traded issues, time until conversion date, securities with similar yields, quality, type of issue, coupon, duration and rating. If events occur that affect the value of the Company s portfolio securities before the net asset value has been calculated (a significant event ), the portfolio securities so affected will generally be priced using fair value procedures. An equity security of a publicly traded company acquired in a direct placement transaction may be subject to restrictions on resale that can affect the security s liquidity and fair value. Such securities that are convertible or otherwise will become freely tradable will be valued based on the market value of the freely tradable security less an applicable discount. Generally, the discount will initially be equal to the discount at which the Company purchased the securities. To the extent that such securities are convertible or otherwise become freely tradable within a time frame that may be reasonably determined, an amortization schedule may be used to determine the discount. The Company generally values debt securities at prices based on market quotations for such securities, except those securities purchased with 60 days or less to maturity are valued on the basis of amortized cost, which approximates market value. C. Security Transactions and Investment Income Security transactions are accounted for on the date the securities are purchased or sold (trade date). Realized gains and losses are reported on an identified cost basis. Interest income is recognized on the accrual basis, including amortization of premiums and accretion of discounts. Dividend and distribution income is recorded on the ex-dividend date. Distributions received from the Company s investments in master limited partnerships ( MLPs ) generally are comprised of ordinary income, capital gains and return of capital from the MLPs. The Company allocates distributions between investment income and return of capital based on estimates made at the time such distributions are received. Such estimates are based on historical information available from each MLP and other industry sources. These estimates may subsequently be revised based on actual allocations received from MLPs after their tax reporting periods are concluded, as the actual character of these distributions is not known until after the fiscal year end of the Company. D. Distributions to Stockholders Distributions to common stockholders are recorded on the ex-dividend date. The Company may not declare or pay distributions to its common stockholders if it does not meet asset coverage ratios required under the 1940 Act or the rating agency guidelines for its debt and preferred stock following such distribution. The character of distributions to common stockholders made during the year may differ from their ultimate characterization for federal income tax purposes. For tax purposes, the Company s distribution to common stockholders for the year ended November 30, 2010 was 100 percent return of capital. For book purposes, the source of the Company s distribution to common stockholders for the year ended November 30, 2010 was 100 percent return of capital. Distributions to mandatory redeemable preferred stockholders are accrued daily and paid quarterly based on fixed annual rates. The Company may not declare or pay distributions to its mandatory redeemable preferred stockholders if it does not meet a 200 percent asset coverage ratio for its debt or the rating agency basic maintenance amount for the debt following such distribution. The character of distributions to preferred stockholders made during the year may differ from their ultimate characterization for federal income tax purposes. E. Federal Income Taxation The Company, as a corporation, is obligated to pay federal and state income tax on its taxable income. Currently, the highest regular marginal federal income tax rate for a corporation is 35 percent. The Company may be subject to a 20 percent federal alternative minimum tax on its federal alternative minimum taxable income to the extent that its alternative minimum tax exceeds its regular federal income tax. The Company invests its assets primarily in MLPs, which generally are treated as partnerships for federal income tax purposes. As a limited partner in the MLPs, the Company reports its allocable share of the MLP s taxable income in computing its own taxable income. The Company s tax expense or benefit is included in the Statement of Operations based on the component of income or gains (losses) to 10